An ordinary annuity is best defined by which one of the following?
A. Increasing payments paid for a definitive period of time.
B. Increasing payments paid forever.
C. Equal payments paid at the end of regular intervals over a stated time period.
D. Equal payments paid at the beginning of regular intervals for a limited time period.
E. Equal payments that occur at set intervals for an unlimited period of time.
The correct answer to this question is option C. We define ordinary annuity as equal payments paid at the end of regular intervals or a stated period of time.
Let me discuss the other options for you:
Option A says that increasing payments paid for a definitive period of time which is not correct because annuity is what we call as an equal amount.
The second option says that increasing payments paid forever that is not correct as I mentioned earlier that in annuity, we pay equal amount at regular intervals.
Option C says equal payments paid at the end of regular intervals over a stated period of time which is correct because annuity is what we call “equity payments”. if these equal payments are made at the beginning of the period, we call it is due annuity. Similarly, if such equal payments are made at the end of the period, we call it as ordinary entity.
Now let me make my point clear with some example;
Suppose company ABC is paying an amount of $5000 each year to a leasing company. Now if this amount is paid at the beginning of the period i.e. January 2020, we call it as due annuity. It is due in a sense that you are paying it in advance. Your leasing period has just started.
On the other hand, if you are paying the same amount at the end of the year i.e. December 2020 then we record it as ordinary annuity.